If you’re not entirely sure what a credit union is or what it does, you’re not alone. In fact, economic experts often refer to credit unions as the financial industry’s best-kept secrets. Credit unions offer many of the same financial products as banks. However, they don’t work in quite the same way. Read on to find out more about how credit unions work and how you can join one.
What Is a Credit Union?
A credit union is another type of financial institution and is essentially a non-profit financial cooperative. With account holders seen as members instead of customers, credit unions run democratically and focused on community. Instead of a hierarchy of employees, members help members. As a member, you can even join the voluntary board of directors. This allows members to get more involved in the union’s decision-making processes.
Some credit unions are small, hyper-local unions based on common connections, while others reach nationwide with thousands of participants. When looking at a credit union vs. a bank, both institutions offer many of the same products like checking accounts or mortgages. However, you’ll typically see more favorable rates and requirements from a credit union than from a big bank. Credit unions also tend to incorporate financial counseling and education. This is made easier by having fewer members than a bank does customers.
How Do Credit Unions Work?
Credit unions are owned and operated by their participants. Members pool their money, creating a source for loans and other financial products. So in a sense, one person’s deposit becomes another member’s mortgage. As a non-profit organization, any excess funds can even be paid back to members as dividends. These practices strengthen the community feel that already exists with credit unions since you typically have to meet a certain qualification to become a member.
Each credit union member also gets a say in how the institution is run. As a member, you can cast your vote for board of directors selections and other decisions, instead of allowing wealthy shareholders to call the shots.
The funds held at a credit union are insured by the National Credit Union Administration (NCUA) instead of the FDIC. This applies to federally chartered unions, or FCUs. Credit unions that aren’t federally chartered are held accountable to state banking laws or covered with private insurance.
Pros of Credit Unions
A huge advantage to credit unions lies in their non-profit structure, which means they don’t have to pay corporate income tax on earnings. That frees up credit unions to concentrate their funds more towards daily operations, better services and lower costs for members.
If you’re looking to save more money, credit unions might be the way to go. They tend to offer higher-earning interest rates on savings accounts, lower rates on loans and minimal fees for their services. These seemingly small differences add up, offering credit union members with a big advantage.
In addition to better-priced products, you’ll also find more of a personalized, community feel at a credit union. To join a credit union, you often have to be a part of a certain community, from religious groups to your workplace. Many find that you’re treated as a member of a community rather than another customer. Plus, you’ll have the ability to run for the union’s board of directors and vote towards decisions, giving you more control.
Cons of Credit Unions
While credit unions offer a ton of benefits, membership does come with its drawbacks as well. Right off the bat, credit unions don’t have the same kind of budgets as big banks do. If you’re a business owner or need more specific financial products, a credit union may not offer what you need due to its limited funding. You can usually find most of the same services and products, but fewer options for each.
Many members find that their credit union falls especially short in their credit card offerings. Credit unions have limited rewards, so you probably won’t earn the same amount of cash back, miles or points rewards as you would with a bank’s card. If you’re used to scoring serious perks and major discounts, you may be disappointed if you switch to a credit union.
Finally, credit unions don’t provide the most convenient “banking” experience. Focused on smaller communities, credit unions almost always have fewer locations than banks. This limits your access to in-person services and even ATM access, especially when you’re traveling. Branches also tend to operate only during traditional business hours. Plus, without the resources of a big bank, credit unions may not be able to offer the most robust online or mobile banking experience. Credit unions do try to combat these shortcomings by partnering together to widen ATM and branch offerings.
How to Join a Credit Union
Joining a credit union means becoming a member of a financial institution that works for the benefit of your community. You also become a partial owner of that financial institution. To join, you just have to open an account. There is usually a small minimum of $5-$25 as a one-time payment to join. The size of your accounts does not determine your share in the credit union. Every member receives an equal vote and chance to run for the board of directors.
Focused on community, joining a credit union is a bit more of an exclusive process. Some only allow members that share a “common bond,” like whether you already have a family member in the union. Other unions base membership eligibility off of your employer, place of worship, school, homeowners’ association or your geographic location. Some unions expand their field of membership even further if you make a small, one-time donation to charity. However, more and more credit unions are beginning to take a more generous approach to membership.
If you want to join a credit union but don’t know where to start, it can help to ask your co-workers and family members. That can automatically give you a way to join a credit union. You can also check the NCUA’s Credit Union Locator or A Smarter Choice to find a credit union in your area that fits your needs.
Credit unions provide a solid alternative to big banks. Before you join a credit union, make sure it’s the exact right one for you. You’ll want to feel comfortable and valued at a credit union. You’ll also want to make sure that the one you choose can offer the kinds of accounts and products you need. It may help to read reviews online and double check the credit unions insurance plans. This is where you’ll be parking your cash, after all.
Tips for Responsible Banking
- It’s easy to get caught up in the chase for credit card rewards. However, it’s more important to first make sure you’re saving enough and using your credit responsibly. That will help you simultaneously avoid falling into debt and prepare for the future.
- Perhaps you don’t need to be told twice, but always make sure you’re not paying any unnecessary banking fees. Maybe you’re paying a monthly service fee when you can find a free checking account with the exact same perks. Or perhaps you didn’t realize you were being charged for getting paper statements. It can help to double check your statements to consolidate your spending and save some cash.
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